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Contemporary Accounting Research Vol. 41 No. 3 2024

Can second‐chance provisions increase the effectiveness of penalty contracts? Evidence from a quasi field experiment

Clara Xiaoling Chen1; Laura W. Wang1; Anne Wu2; Steve Yuching Wu3

1 Department of Accountancy, Gies College of Business University of Illinois at Urbana Champaign Illinois USA · 2 Department of Accounting, College of Commerce National Chengchi University Taipei Taiwan · 3 Ivey Business School Western University London Ontario Canada

open access

Abstract

Penalty contracts are commonly utilized in developing countries. Such contracts may be perceived as unfair, potentially reducing employee motivation and performance. We predict that adding a second‐chance provision , an opportunity to reverse a penalty for poor performance if subsequent performance improves, could improve the effectiveness of penalty contracts. In a quasi field experiment at a company with two manufacturing facilities in Taiwan, we treated one facility with a traditional‐penalty contract without a second‐chance provision and the other with a penalty contract with a second‐chance provision. We observe a significant difference in the two treatment effects, with employee performance decreasing significantly after the traditional‐penalty treatment but showing no decrease when a second‐chance provision was included. Further analysis reveals that this difference is mediated by employees' fairness perceptions. These results provide valuable insights to governments, nongovernmental organizations, and multinationals as they work together to improve the fairness of global compensation practices.

DOI
10.1111/1911-3846.12961
Volume
41
Issue
3
Pages
1672-1694
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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